Be a Believer in Cryptocurrencies
Crypto and blockchain present themselves as the most dramatic force of change since the internet. The fact that crypto is not regulated by a central bank is at the very heart of its beauty. It does not require central bank oversight because it is backed by its underlying technology. Crypto represents the democratization of finance. Crypto is the first tangible step towards narrowing the massive divide between rich and poor. To break the circle of poverty and increasing inequality, the world needs to find ways to achieve financial inclusion. More than 2 billion people do not have access to basic financial services. The existing banking model does not cater to those that are marginalized economically. The cost overheads of the bloated and inefficient system of banking branches, physical representatives, the arcane methodology of processing and confirming transactions do not make financial sense to cater to this clientele.
For the first time in decades, we can contemplate a world that can exist without traditional financial institutions and that is exceptional.
Here are FIVE reasons why you should be a crypto disciple.
Reason 1: Bitcoin – Twice as Good as Gold
Bitcoin was born after the Lehman's collapse, coronavirus represents the cryptocurrency's first "black swan" test. It entered the pandemic at the beginning of this year trading around $7,180 and currently finds itself changing "hands" at $9,200 as of May 24th 2020 (https://www.coindesk.com/price/bitcoin). This translates into a gain of 28 percent. Is this good or bad? Warren Buffett and Charlie Munger, the top dogs at Berkshire Hathaway have taken turns at pummeling bitcoin, referring to it as “rat poison squared” and “pure dementia”. A return of 28 percent when the world is melting down sounds pretty darn good to me for “rat poison squared”!
Finance, however, is a relative game. Performance is neither good nor bad – it is better or worse when compared to its peers. An African parable talks of two men walking through the bush and come across a hungry lion. One man leans over and starts to tie his shoelaces. The other says there is no way he will be able to outrun the lion. The man tying his laces looks up at his companion and says: "there is no need for me to outrun the lion, I just need to outrun you".
Bitcoin is often referred to as digital gold. Cryptocurrencies are mined and mining is hard. It is designed to be hard – similar to the process of extracting gold from the earth. The media has explained mining as the process of solving a really complicated and computationally intensive math equation. Simple algebra is the study of mathematical symbols and the rules for manipulating these symbols. For example, you are given two equations, with two variables and you need to solve the value of these variables. Mining involves solving for multiple variables. The only way to find the answer is to test millions of combinations.
So how has bitcoin performed versus gold – a commodity that typically does very well during times of panic? According to information from Bloomberg (https://www.bloomberg.com/quote/XAUUSD:CUR), gold entered the year trading at $1,517 per ounce and as of May 24th, 2020 was changing hands at $1,734 which is a gain of around 14 percent. This means that rat poison squared (which has been around for 11 years) has delivered twice the total return of gold (which has been around forever).
Reason 2: No one Loves their Bank – and Want Change
In a world where people tattoo brands like Harley Davidson, Netflix Apple, why is it that there are no bank logos on body parts? If banks launch a new product, do normally intelligent people call up their friends, arm of a posse of disciples with camping chairs and a basket of sandwiches, and camp overnight outside the branch waiting desperately for it to open so they can storm in and fondle the new service? Do people sneak out of the office early on a Friday, head straight home, storm through the front door, and log into their bank accounts so that they can binge-watch the educational video on internet banking? Do people spend hundreds of dollars on hipster leather biker jackets with their bank logos emblazoned on their backs? I think not because banking is as enjoyable as sucking on Gandhi's dusty thong. The Millennial Disruption Index reports 71% of millennials would rather go to the dentist than listen to what banks tell them. That is not a monumental kick in the balls to the banks. Millennials would rather lie flat on their backs, open their mouths, and have sharp needles and drills perforate the soft vulnerable skin tissue around their teeth than interact with their banks. You do not need to be Alan Turing (the genius that cracked the German Enigma code) to decipher the takeaway of this nugget of information. Banks suck and technology is going to drive many of them out of business.
Why has traditional banking not captured the hearts and imagination of the average man? The answer is simple. In 2008, banks lost their biggest asset and that is trust. They lost the trust of their clients and technology companies moved rapidly to fill the gap. Cryptocurrencies, blockchain, and crowdfunding have now made possible a life without banks and the world is rejoicing. If you want to transfer money or pay accounts, crypto accounts allow you to do so. If you want to borrow or invest money, you can go to crowdfunding sites like Moneytree or Lending Club. If you want to buy and sell stocks or mutual funds, you can do so through apps like Robinhood.
Reason 3: Bitcoin Could be the Next Global Currency
I am a huge fan of global currency markets or forex markets as they are traditionally known. I am the braless teenage girl in the front row of the concert shouting, screaming, and flashing my tits at the stage. I love the fact that a chunk of the market is not motivated by profit and are simply going through the motions of buying and selling currencies to settle commercial or personal transactions. They also help to stabilize troubled economies by acting as shock absorbers. The problem with currencies, however, is that we have now taken a whiff of something better, and our nostrils are tingling with pleasure. Let me walk you through why a crypto like bitcoin could be the world's single currency in the medium to long term (echoing the words of Twitter founder Jack Dorsey).
1) The Emperors are not Wearing any Clothes
The haters say that crypto is not backed by anything and fiat currencies are. Let me give you a quick reality check. Fiat currencies are not backed by anything. They used to be backed by gold. That is no longer the case. They have the inherent value of a piece of paper, some fancy ink, and a watermark. Do you know how much it costs to print a Benjamin (a $100 bill)? In the region of 12cents. Money has no inherent value. In the old days when Elton John was wearing bright pink spectacles and clonking the ivories on a huge white piano, you could take your Benjamins to the Fed and exchange them for gold, which you could meltdown and use the gold as front teeth. Those days are over. Bitcoin, on the other hand, is mined. There is a degree of scarcity to bitcoins – in the same way, that there is a scarcity of intelligence in central banks. Marketwatch published a list of prices in 2018 of costs of mining one bitcoin. The range of costs is wider than the gap between Alfred E Neumann's two front teeth. Venezuela comes in at the lower end of the scale with $531, followed by a Donald Trump favorite, Ukraine at just over $1,800. On the upper end of the scale is South Korea, where mining will cost north of $26,000. This means that bitcoin miners in Seoul are rarer than a virgin in Arkansas during the Clinton years.
Central bankers have been running those printing presses hot around the clock. According to data from Bloomberg, the global money supply increased by 230 percent since 2003. It was sitting at 23 trillion dollars in 2003 and now is close to 80 trillion. The rain forests are weeping copiously and so should you because this money has been created out of fresh air. You may argue that this money is backed by the full faith and credit of the issuing country. Let's have a look at the star-spangled balance sheet, and you will quickly notice that you need to be very brave to put your hope in the long term viability of the U.S. dollar.
The U.S. has a fiscal gap – it is the difference between their income and their spending. For the U.S., spending is divided into five categories – healthcare, social security, other mandatory, discretionary, and interest. In 2018, according to the website Committee for Responsible Federal Budget, the sum of all these outlays was 20.6 percent of GDP. In 2018, nominal GDP was in the region of 20 trillion dollars indicating that the U.S. spent $4, 1 trillion. How much did they receive in income? Approx. 16 percent of GDP which weighs in at around $3.2 trillion, opening a little fiscal gap of almost $1 trillion or 4 percent of GDP. There is no indication that this gap is going to narrow anytime soon. In 2050, this fiscal gap is expected to be more than 10 percent of GDP and by the turn of the century close to 20 percent. If the U.S. was a company, it would have found itself in chapter 11 more than a decade ago. Fiat currencies are built on the U.S. dollar which is backed by a bankrupt government. The only thing that is keeping the U.S. afloat is their ability to print Benjamins – and they are paper gold for now. This party still has some way to go, but in the medium to long term, the world is going to realize that the emperor is wearing no clothes – the pure image of Trump naked is going to require shock therapy to bolt us back into coherence.
2) The Heir Apparent Has Abdicated
Assume the naked emperor, who in December 2019 changed his skin tone from orange to a more peachy hue, decides to run into the wilderness and tragically succumbs to frostbite in his biggest appendages (his toes) and dies. Would the euro be in a position to take over the reins? We have already seen that the euro is in a long term decline and is unlikely to see the third decade of this century.
3) How about the Renminbi?
China is on the rise and challenging U.S. dominance. Chinese officials have encouraged the U.S. to get out the business of managing a global currency but that would be gringo suicide. Could the renminbi, aka the yuan, replace the dollar as the global currency? The Chinese would like nothing more. They export huge quantities of commodities that are denominated in U.S. dollars. Using the yuan as the base currency for these trades would remove the headache of currency volatility. Other central banks would need to hold their currency as a reserve and this would bring down their cost of borrowing. In 2015, the IMF awarded the yuan status as a reserve currency, but can it replace the greenback? China would need to work hard to win the world’s trust.
In light of all this, bitcoin is not such a far stretch. Jack Dorsey could be onto something as new generations approach economy and finance from a different angle.
Reason 4: There Are Lots of Haters
I am a contrarian. If there are lots of haters, it means that interests are being challenged and change is on the horizon. The more powerful the haters, the more dramatic the potential change. Occam's razor states that for any given set of explanations for the occurrence of an event, the simplest one is most likely the correct one. In the distorted world of finance, Occam's razor often does not apply, and this is particularly true when it comes to cryptocurrencies. When a banker goes on TV and says that bitcoin is a fraud if you apply Occam's razor the simplest explanation would be because bitcoin is not regulated and can be used to commit crimes and launder money. If one digs below the surface, you will find that this simple explanation is not the most plausible. Bankers feel threatened by crypto because crypto was invented to disintermediate banks – to bypass them and allow people to transact independently of them. Regulators do not like crypto because they cannot tax or control it. In politics, it is known as flip-flopping in the United States. In the United Kingdom, they call it doing a U-turn. In Australia and New Zealand (a country that is frequently left off world maps), it is called it a backflip. This is a sudden real or apparent change of policy or opinion by a public official, sometimes while trying to claim that both positions are consistent with each other.
Bitcoin has several flip-floppers in its ranks, the most high profile being Goldman Sachs, JP Morgan, and George Soros. That is the trinity of financial influence right there. They are the Muhammad Ali, Joe Louis, and Rocky Marciano of heavyweights in the world of finance, and each one of them has done a massive U-turn on bitcoin. On February 6, 2018, Goldman Sachs warned the market to get ready for all cryptocurrencies to hit zero. On April 23rd that same year, Goldman Sachs announced that it had hired crypto trader Justin Schmidt to head up their digital asset trading desk. On September 12th, 2017, Jamie Dimon, the Chief Executive Officer of one of the world's largest banks, said that bitcoin was a "fraud". On January 9th, 2018, less than four-month later, Dimon said that he regrets calling bitcoin a fraud. On January 25th, 2018, arguably one of the greatest traders ever, the man who single-handedly broke the Bank of England and made a tidy $1 billion, was interviewed at the World Economic Forum in Davos and was asked about bitcoin. He said that bitcoin was a "typical bubble". Two months later, Soros announced that he was gearing up to trade crypto in his hedge funds. These are astonishing flip flops from some of the most powerful men and institutions in finance.
Reason 5: There is No Regulation
The most common complaint about cryptocurrencies is that they are not regulated or backed by a central bank. I am gobsmacked that haters see this lack of regulation as a bad thing. Why do they still trust regulators and central banks? The performance of regulators and central banks in the first 20 years of this century has been abysmal. I am surprised there have not been mass executions of top officials.
We are going to look at their track record. I will start with the Securities and Exchange Commission in the United States. In 2008, Bernard Madoff for a $45 billion Ponzi scheme that he had been running for decades. Bernie had been taking more money from people, which included Holocaust victims (Bernie himself is Jewish) and was using that new money to pay the returns of the existing investors, most of whom were independently wealthy. Bernie was the reverse Robin Hood. He would steel from the middle class to pay the rich. He truly was a fine and honorable human being. Eight years before they arrested Bernie, the SEC received notification from a whistleblower. Harry Markopoulos is a forensic auditor with the cunning of a fox and the nose for fraud of a bloodhound. He warned the SEC in 2000 that Bernie was up to no good. Harry repeated this warning to the SEC on numerous occasions only to be rebuffed with the same prejudice that a Russian supermodel would a red-headed pimply high school kid.
It was only 8 years after the first whistle was blown that the SEC put down their coffees and doughnuts, got off their fat arses and did something. Now they were so busy looking into Bernie, that they forgot to check in on one of the biggest investment banks in the country - Lehman Brothers. The largest banking bankruptcy in the history of humanity was a double body blow to the SEC. It highlighted the complete inability of the regulator to regulate. Regulators are like airbags in a car. They work well, but really well until such time as you are involved in a wreck at which point that does not work at all.
We now cross the street to central banks. The biggest and baddest central bank on the planet is the U.S. Federal Reserve. The joke on Wall Street is that the most powerful person in the world is not the U.S. president or even Vladimir Putin, it is the Fed Chairman. I said it was a joke, I didn't say it was a good one. Wall Street clearly is better at creating economic weapons of mass destruction than they are at comedy - don't quit your day jobs boys. What is the business of a central bank? The mandates of most central banks are to courageously fight inflation - an enemy that has been dead for over a decade as we live in a world of low and negative interest rates. In my opinion, central banks are in the business of printing money and creating asset bubbles. Printing cash and bubbles - sounds like fun.
In the last twenty years, we have been graced with two asset bubbles - the first was the dot.com bubble in 1999 and 2000. This was a localized crisis and more or less contained in the stock market. In 2007 and 2008 we had the subprime mortgage crisis which was not localized and not at all contained. It spread like a wildfire to other sectors and was soon melting down the globe. It was the mother of all meltdowns and taught us one very valuable lesson - the financial regulators did not have a clue what they were doing. They oversaw the boom of subprime collateral debt obligations and then the derivatives on these toxic assets and did absolutely nothing to control them. The regulators then left everything up to the central banks to clean up this catastrophic mess left behind. The chain of incompetence was unbroken. The central banks also proceeded to amaze us with their lack of talent.
Let's go back to the dot.com bubble. The poster child of dot.con was Pets.com. The pet food and supplies company is the most recognized flop because of its famous marketing campaign. Pets.com ran ads of a dog sock puppet interviewing people on the street. The mascot appeared in a Super Bowl commercial and even got its own balloon in the Macy's Thanksgiving Day parade in 1999. But Pets.com's business model wasn't sustainable. The company lost $147 million in the first nine months of 2000, and the company was unable to secure more cash from investors. When Pets.com went public in February 2000, its stock started at $11 a share and rose to a high of $14. But the rally was short-lived and Pets.com's stock quickly fell below $1 and stayed there until its demise. The company folded in November 2000, laying off about 300 employees. While the company was folding, the market was in a tailspin wiping out trillions of dollars of wealth.
The U.S. Federal Reserve, under the watchful eye of one Alan Greenspan, embarked on a brilliant strategy. He drew on every single skill and faculty that he had honed and primed with surgical precision over the decades. Using sophisticated econometric and Monte Carlo simulation models which were tested, and then retested. The Fed cut interest rates quicker than Rapunzel’s dash to the phone during a Hair-in-the-Spray infomercial. From June 2000, the Federal Reserve cut rates from 6.5 percent to 1 percent by the end of 2003 in a desperate effort to cheapen money and get the U.S. consumer to resume spending.
The dot.com bust affected consumption, the principal motor of growth in the U.S. economy. The technology-rich NASDAQ index hit its Everest summit on March 10, 2000, and a market capitalization of $6.6 trillion. It hit the bottom in October 2002 at 1114 or a market capitalization of $1, 6 trillion. This means that in the short space of 30 months, a total of $5 trillion was obliterated from the face of the earth. Granted, not all of this loss was borne by the U.S. households, but let’s take a conservative estimate that it was half. When Americans feel $2.5 trillion poorer, the only natural reaction is to retract into your shell like a frightened turtle. Greenspan did not want to happen. To keep turtle out and spending, the Fed started to throw money at them. But cutting the base Federal Reserve rate to 1 percent, money was almost free.
The same happened after the 2007/2008 financial collapse, but on this occasion, the Fed had to go deeper. The Fed, now under chairman Ben Bernanke, cut rates from 5.5 percent to effectively zero between 2007 and 2009. The Fed held interest rates at close to zero until the end of 2015 when it executed the first interest rate hike in more than seven years. Ben Bernanke, one of the most powerful central bankers in the world at the time, became known as helicopter Ben. The phrase "helicopter money" was first coined by Milton Friedman in 1969, when he wrote a parable of dropping money from a helicopter to illustrate the effects of monetary expansion. The concept was revived by economists as a monetary policy proposal in the early 2000s following Japan's Lost Decade. In November 2002, Ben Bernanke, then-Federal Reserve Board governor, and later chairman suggested that helicopter money could always be used to prevent deflation. When faced with risks of deflation, or contracting economic growth, central banks fire up the printing presses and start cranking out the money. Economies work on animal spirits. When markets crash, these spirits are tamed and subdued. Central bankers need to get energy levels up. Throwing cash at people is like watching steroid injected rodeo bulls bolt into a frenzy of hooves, horns, and hormones.